Illegal cigarettes: Who pays the price?

A global problem

Some research indicates that up to 660 billion cigarettes a year are illegal – smuggled, counterfeit or tax-evaded in other ways. That’s up to 12% of world consumption.

Cigarettes are among the most commonly traded products on the black market due to high profit margins, relative ease of production and movement and low detection rates and penalties.

The shadowy nature of this trade makes the scale of it hard to estimate, but we have developed research methods to help our companies and governments to understand it better. These include market surveys, consumer research and analysing packs collected from consumers to estimate the difference between duty-paid shipments and actual consumption.

Our own research currently indicates a global problem of some 330 billion illegal cigarettes a year, but this may underestimate the scale. Other bodies concerned about tobacco trafficking, such as the Framework Convention Alliance, put the global figures at twice as much, around 660 billion.

In 2013 alone we invested more than £50 million to fight this illegal trade.

A damaging trade

For governments too, there is a huge cost. The losses in unpaid tobacco taxes are estimated to be up to £30 billion worldwide. It’s obvious why we see illegal tobacco as a major threat to our business.

Yet some governments are unaware of how bad the problem is and do not acknowledge its link to tax levels.

Legitimate retailers – often small or family businesses – are also damaged as smugglers and criminals steal their trade, while rules for retailers to prevent sales to children are undermined by illegal sales away from the eyes of the authorities.

Counterfeit tobacco products

At nearly 40% of market share, Malaysia has one of the highest volume of illegal cigarettes in the world."

Illicit Trade in Tobacco Products 2012, Euromonitor International

Fakes can be almost impossible to tell from the real thing. Another problem is ‘look-alike’ cigarettes, where the criminals mimic an original design with some changes. For example, our State Express 555 brand may be copied but the numbers changed to 999. Consumers may think it’s just a new variant.

Counterfeits can also be riskier to health than genuine product. They are likely to contain many times the levels of tar and carbon monoxide found in genuine cigarettes, and in some cases can contain insects and human faeces.

The vast majority of fakes come from illegal operators in China, then Paraguay, the Middle East and, to a lesser extent, Eastern Europe.

Raids by the authorities do take place but many operations are small, highly mobile and difficult to trace in remote areas. The makeshift factories, where the cigarettes are usually packed by hand, can vanish within hours and set up elsewhere.

Crime and reward

Illicit trade is not just the work of small operators. Organised crime is increasingly dominant. The rewards can be high. Just one shipping container full of trafficked cigarettes could earn a criminal gang more than US$1 million.

Interpol, the international police organisation, says gangs that traffic drugs, arms and people are also behind the illicit cigarette and alcohol trade. The US Department of Justice says some also have ties to terrorist organisations.

What can be done?

We fully support regulators, governments and international organisations such as the World Customs Organization, the World Trade Organization, World Health Organization and European Union in seeking to eliminate all forms of illicit tobacco trade. We would like to see all our markets free of it.

We see it as vitally important that governments establish workable tax regimes and economic policies that do not create conditions that encourage illicit trade, with strong border controls and effective laws to fight the black market.